Agencies-Gaza post
World Bank: Palestine’s economy remains highly challenging due to very low aid
Despite indications of healing after the easing of COVID-19 related efforts, the fiscal crisis in Palestine remains highly oppugning due to the assembly of large arrears and very low support, according to the World Bank.
Besides, the COVID-19 pandemic had a harsh effect on the well-being of Palestinians and led to the emergence of newly poor Palestinians, as well as a general increase in the exposure to food insecurity. The outlook stays precarious, and steps are required to place the Palestinian economy on a tolerable course.
The World Bank’s Palestinian Economic Monitoring Report to the Ad Hoc Liaison Committee (AHLC) will be delivered in Brussels on May 10, 2022, during a policy-level meeting for development aid to the Palestinian people. The report emphasizes the critical risks facing the Palestinian economy and the needed fiscal reforms. It also outlines the key areas in which Palestinian lives have been impacted by the pandemic and its limitations.
“Despite impressive fiscal consolidation efforts over the years, the size of the fiscal deficit has remained large. Given a sharp decline in aid from 27% of GDP in 2008 to 1.8% in 2021, the Palestinian Authority (PA) has accumulated a large stock of arrears to the private sector, the pension fund, and domestic borrowing. As domestic financing options are no longer possible, pressing on with priority reforms to increase revenues and improve fiscal sustainability is very important.” stated Kanthan Shankar, World Bank Country Director for West Bank and Gaza.
After one of the biggest recessions on record when the economy shrank by 11.3% in 2020, the growth rate reached 7.1% in 2021. This increase was mainly due to higher consumption in the West Bank following the easing of COVID-related measures and the increase in the number of Palestinians working in Israel and the settlements. Gaza’s recovery was slower given the May 2021 devastating Israeli attacks that lasted for 11 days.
Despite the economic recovery, the management of fiscal policies remained challenging as the size of the deficit before aid reached $1.26 billion while aid hit a record low of only $317 million in 2021. Consequently, the PA had to rely on domestic resources to finance its needs and has also been paying partial salaries since November 2021.
Economic growth and the PA’s revenues remain below potential due to movement and access restrictions, including in Area C which makes up over 60 percent of the area of the occupied West Bank. Palestinian external trade is controlled by Israel and is subject to costly non-tariff barriers that have reduced competitiveness. Furthermore, the Israeli closure on Gaza has resulted in an almost completely closed economy. The fiscal deficit (before aid) is expected to remain large in 2022 at 5.1% of GDP.
To help achieve fiscal sustainability, the report calls on the international community to provide budget support and urges greater efforts by the PA to pursue reforms in revenue and expenditure. However, reforms need to be carried out gradually to avoid negative social implications, especially in the post-pandemic context. For example, revenue reforms should initially focus on high earners who are not fully paying their dues. The report also recommends that the PA revisits expenditure on the wage bill, improve value for money in the health system, better manage the public pension fund, and reduce net lending.
While PA reforms are necessary to reduce the size of the fiscal deficit, they are not sufficient to secure sustainable development. Cooperation by the Government of Israel (GoI) is essential to increase revenues. Granting Palestinian businesses access to Area C could increase the PA’s revenues by 6% of GDP.
The GoI could regularize and systematically transfer the monthly PA’s share of Allenby Bridge exit fees. Renegotiating down the 3% handling fee charged by the GoI to handle Palestinian imports is also a priority. The report commends the recent implementation of a pilot for an e-VAT system, whereby traders are granted the option to issue transaction receipts digitally. This important step for cooperation on fiscal matters could further be consolidated so that both interfaces are linked in real-time.
“In an already weak economy being also hit by COVID19, the impact on Palestinian livelihoods and welfare has been aggravated. The pandemic has not only reinforced previous vulnerabilities but has led to the emergence of a substantial number of newly poor Palestinians. The World Bank report provides an analysis of the impact of COVID-19 on poverty. This is critical as the analysis helps identify the most prevalent vulnerabilities and guide future interventions to support more resilient livelihoods,” said Shankar.
At the peak of the lockdown and economic limitations, around 110,000 additional Palestinians entered poverty. The new poor were concentrated in rural areas of the West Bank and were more likely to be living in female-headed households. With 20% of previously used main income earners losing their jobs, income fell in more than 60% of Palestinian households during the height of the pandemic.
The report suggests that there is a broad vulnerability to food insecurity because of the pandemic even in relatively better-off households on the West Bank. Children in the poorest families faced the biggest difficulties in accessing education during lockdowns, mainly because of a lack of internet connectivity.
Source: WAFA
